Introduction

When a taxpayer is eligible for an income tax refund, but there is an existing outstanding demand from any previous assessment year, the Income Tax Department has the authority to adjust the refund against such demand. This provision ensures that pending tax liabilities are recovered before disbursing fresh refunds. The adjustment is carried out under Section 245 of the Income Tax Act, 1961. While lawful and systematic, the process involves specific conditions, notices, and response opportunities for the taxpayer.

Legal Framework of Section 245

Section 245 empowers the Assessing Officer or Central Processing Centre (CPC) to set off any refund payable against an outstanding tax demand, whether it pertains to income tax, interest, penalty, or fees. However, the law also mandates that the taxpayer be given prior intimation of such adjustment. This is done to ensure that the taxpayer is aware of the demand and has an opportunity to respond or contest the validity of the adjustment before it is enforced.

Intimation and Response Requirement

Before making the adjustment, the tax department sends an intimation to the taxpayer under Section 245 through the income tax portal and by email or SMS. The intimation contains details of the refund due, the assessment year, the amount of demand pending, and the proposed adjustment. The taxpayer is typically given a fifteen-day period to respond. If no response is submitted within this window, the department proceeds with the adjustment and credits only the balance refund, if any.

Verification of Outstanding Demand

Upon receiving the intimation, the taxpayer must verify the correctness of the outstanding demand. This includes checking the relevant order, assessment year, nature of demand, and whether it has been paid, rectified, or disputed. Discrepancies may arise due to incorrect entries, TDS mismatches, or previously rectified orders not updated in the system. Taxpayers can view demand details by logging into the income tax portal under the “Pending Actions” tab.

Filing Objection or Rectification Request

If the taxpayer finds the demand incorrect or already settled, they may file an objection online through the portal. The option to respond to the demand under Section 245 is available where the taxpayer can accept or disagree with the adjustment. If the disagreement is selected, the taxpayer must provide a reason and upload supporting documents such as challans, rectification orders, or correspondence with the tax department. A rectification under Section 154 can also be filed simultaneously if required.

Adjustment Process and Refund Settlement

If no valid objection is received, the tax department proceeds with the adjustment and issues a revised intimation reflecting the deduction of demand from the refund amount. The remaining refund, if any, is credited to the bank account pre-validated by the taxpayer. The process is documented in the intimation under Section 143(1) or 245, depending on the status of the original return. Interest on refund may be reduced proportionately in case of adjustment.

Rights of the Taxpayer and Legal Remedies

Taxpayers have the right to seek a detailed explanation or challenge the adjustment by approaching the jurisdictional Assessing Officer, filing rectification requests, or even appealing to the Commissioner of Income Tax (Appeals) if the demand is disputed. In case of excessive or wrongful adjustment, the taxpayer can request a refund of the excess amount and claim interest under Section 244A for the delay or wrongful withholding of refund.

Precautionary Steps to Avoid Future Adjustments

To avoid refund adjustments against old demands, taxpayers should regularly verify their tax accounts on the income tax portal. Prompt response to notices, updating challan details, and filing rectifications where needed help ensure that pending demands are either cleared or updated in the system. Keeping accurate records of tax payments and reconciliations across years also helps prevent surprise adjustments and ensures smoother refund processing.

Conclusion

Refund adjustment against outstanding demand is a legitimate mechanism under tax law that ensures recovery of dues before issuing refunds. However, it must be done transparently and with adequate notice to the taxpayer. By verifying demands, filing objections promptly, and maintaining accurate tax records, taxpayers can protect their rights and ensure proper credit of refunds. The process reinforces the government’s goal of fair and efficient tax administration while upholding taxpayer participation and accountability.

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